Office of Inspector General (“OIG”) Advisory Opinion 25-09[1] addresses an inquiry from a company that develops, manufactures and sells medical devices used in emergency stroke treatment and provides commentary for similarly situated business looking to navigate potentially complicated investor situations. The company in question requested this opinion to determine whether the below-described arrangement would be grounds for sanctions under federal anti-kickback statutes. After an extensive, fact-based analysis, OIG determined that the company was not subject to sanctions as the arrangement did not generate prohibited remuneration.
Background:
The company is owned approximately 35% by physician owners, which also includes the device inventors. The inquiry for an advisory opinion stemmed from the company’s concern that while the physician owners were in a position to order, purchase or recommend the company’s devices for use in hospitals, no other owners were in such a position to influence referrals or generate business.
Under the federal anti-kickback statutes, it is a criminal offense to “knowingly and willingly offer, pay, solicit, or receive any remuneration to induce, or in return for, the referral of an individual to a person for the furnishing of, or arranging for the furnishing of, any item or service reimbursable under a federal health care program.”[2] There are statutory exceptions and safe harbor regulations that can provide protection to a company, however, the requirements for gaining the protection require strict and precise compliance with each and every component of the exceptions and safe harbors.
In OIG’s advisory opinion, the Assistant Inspector General walks through the potential applicability of the Small Entity Investment safe harbor,[3] which has eight (8) specific requirements that must all be met. The eight (8) requirements are:
- No more than 40% of the value of the investment interests are held by referral sources;
- Terms of investment offered to potential referral source investors (physician owners) versus non referral source investors (non-physician owners) are identical;
- Investment terms cannot be related in any way to prior or expected volume of referrals;
- There is no requirement to generate referrals to remain an investor;
- There cannot be any special treatment or marketing to/for investors based on referrals;
- No more than 40% of the company’s gross revenue in a 12-month period can come from investor referrals;
- No loans or loan guarantees may be made to an investor with the ability to generate referrals for the purpose of obtaining an interest in the company; and
- Investor distributions are directly proportional to the amount of investment.
In this instance, the company certified that all of the above eight (8) standards were accurate and applicable to the company.
Analysis:
In its analysis, OIG stated that while scenarios like this one are generally suspicious, OIG will look further into company specifics for other questionable features of the scenario to make an accurate assessment of violation. The analysis OIG undertakes includes reviewing actions such as intentionally selecting investors who are in a position to make referrals, requiring investors who leave the company’s service area to give up their shares or interest in the company, or distributing extraordinary returns that do not line up with expected business practices or respective investment shares.
In this case, OIG determined that although this could be a generally suspicious scenario, nothing of elevated concern was taking place within the company. OIG also acknowledged that the company was operating in strict compliance with all eight (8) safe harbor requirements, making its compliance clear.
Ultimately, OIG decided not to take any action against the company given its strict compliance with all eight (8) safe harbor requirements.
Future Considerations:
Companies in similar positions should take care to assess and monitor their ownership structures and revenue thresholds on an ongoing basis, especially if they are proactively relying on safe harbor requirements or exceptions to avoid federal anti-kickback statute violations. Strict compliance with all components is necessary and required to maintain protection.
Companies with investors in a position to make referrals should also implement and follow robust compliance policies for ongoing guidance, protocol and company structure. These policies should include specifics on actions that are prohibited, who oversees monitoring, and plans of enforcement. Companies should also plan on conducting regular training on these policies to build internal awareness.
Finally, companies should remain committed to ongoing internal monitoring to ensure continuing compliance with safe harbor standards, which was a key component of OIG’s analysis in this advisory opinion.
For further information regarding OIG Advisory Opinion 25-09, please contact the authors at Slyness@FoxRothschild.com and MCurrie@FoxRothschild.com.
Sarah and Meghan are Associates and members of the Health Law Practice Group at Fox Rothschild LLP. They are based in Princeton, New Jersey and specializes in assisting clients with corporate, health law, and M&A matters.
[1] Advisory Opinion 25-09 | Office of Inspector General | Government Oversight | U.S. Department of Health and Human Services
[2] Section 1128B(b) of the Social Security Act
[3] 42 C.F.R. § 1001.952(a)(2)